EU ETS Phase Four Reform Complete

On 27 February 2018 the Council of the European Union formally approved the reform of the EU ETS for the period after 2020. The reform will put the EU on track to deliver on the pledges made under the Paris Agreement.

The amendments to the EU ETS Directive will reduce availability of CO2 emission allowances in the EU carbon market by increasing the annual linear reduction factor of the cap from 1.74% to 2.2% from 2021. The linear reduction factor will be kept under review with the option to increase it further by 2024 at the earliest. To accelerate the reduction of the current surplus of allowances in the EU carbon market, the intake rate of the previously agreed Market Stability Reserve (MSR) will be doubled. If the number of available emissions allowances exceeds 833 million, the MSR will withdraw 24% (instead of 12%) of allowances per year, for the first four years starting in 2019. In addition, from 2023, excess allowances in the MSR will be permanently cancelled if the total amount of allowances in the reserve exceeds the amount sold at auctions in the previous year.

The text adopted by the Council also includes revisions to better target free allocation to address carbon leakage. Additionally, the amendments will establish financial support mechanisms to promote low-carbon innovation, and support the industry and the power sector in lower-income Member States.

Formal approval at the Council was the final step in a legislative process that lasted more than two years. The new directive will enter into force on the 20th day following its publication in the official journal.